Is the US oil boom in trouble?

Oil prices continue to drop, energy companies are taking on large amounts of debt, and some call into question rosy projections about a long-term US shale boom. Should we be concerned about the future of American oil and gas?

Lucy Nicholson/Reuters

The US flag is displayed at Tesoro's Los Angeles oil refinery in Los Angeles, California. Booming supplies of US oil have helped drive down the price of oil to around $80 a barrel in recent weeks.

A dramatic rise in US oil and natural gas production has altered the global energy landscape, buoyed an economic recovery, and pushed down oil prices worldwide.

The question is: How long can the so-called shale boom last?

No one can be 100 percent sure, but most projections see the US remaining an energy powerhouse for decades to come. New techniques and technologies will continue to unlock oil and gas from increasingly stubborn rocks, according to various government, industry, and independent analyses.

But some critics say these forecasts are overly optimistic and fail to take into account just how much energy, money, and ingenuity it takes to maintain unconventional oil and gas production, let alone expand it. And a recent drop in the price of oil calls into question not just how much oil and gas is left, but how much of it can still be profitably extracted.

Today, US oil production is at its highest level in three decades, and the country imports dramatically less. Natural gas production is so high that terminals are being built to ship it abroad, and booming oil production has spurred talk of lifting the decades-long crude export ban. Innovations like hydraulic fracturing and horizontal drilling have unleashed a glut of oil and gas in shale formations from North Dakota’s Bakken to Texas’s Eagle Ford.

Recent developments threaten to undermine that momentum, however. New supply and weak demand is pushing down oil prices globally, threatening to make costly US shale extraction uneconomic. Limited pipeline capacity and overproduction of natural gas in the Marcellus shale has pushed prices down, making it hard for producers to turn a profit. Drillers are taking on ever increasing amounts of debt to finance their operations. And there may not be as much shale oil and gas as the US government forecasts, according to a new report from the Post Carbon Institute, a California-based think tank that promotes sustainable energy.

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“Shale will be robust for the next four or five years, but because of declines at the well-level and field-level, it’s not sustainable in the medium and longer term,” says study author David Hughes in a telephone interview Tuesday. “Policymakers should be aware of that before they try to cash in on a bounty that may not exist ten or fifteen years down the road.”

The study suggests US oil and gas production potential is exaggerated in US Energy Information Agency data – official government statistics and projections that widely inform policy and investment decisions. The Post Carbon Institute estimates that oil production from the country's top two shale formations will under-perform EIA projections by 28 percent between 2013 to 2040. Shale gas production from the country's top seven plays will under-perform EIA forecasts by 39 percent over roughly the same time frame, according to the study. The EIA did not respond to requests for comment on the study.

“We’re approving [liquefied natural gas] exports, there’s talk of lifting the oil export ban,” says Asher Miller, executive director of the Post Carbon Institute. “All of that is based on this assumption that we have that this shale revolution is going to be around for a while.”

It’s not just EIA projections that could be exaggerated. There can also be a discrepancy between the amount of oil that companies tell the investors they’re sitting on and the amount of oil they tell the federal government they have in proved reserves. The gulf between the two numbers is often large; the amount touted to investors can be anywhere from 5.5 times to 27 times higher than the proved reserves, according to a Bloomberg analysis.

“They’re running a great risk of litigation when they don’t end up producing anything like that,” Jon Lee, a University of Houston petroleum engineering professor, told Bloomberg. “If I were an ambulance-chasing lawyer, I’d get into this.”

The precipitous drop in oil prices has already affected drillers and hurt their bottom line, driving down the number of rigs actively drilling for oil.

“Unless there’s a significant reversal in oil prices, we’re going to see continued declines in the rig count, especially those drilling for oil,” James Williams, president of WTRG Economics,told Fuel Fix last week.

But some are skeptical that lower oil prices will temper the US shale boom. Increases in price incite innovations, according to Mark Mills, a senior fellow at the Manhattan Institute, a conservative New York-based think tank. And those innovations, Mr. Mills argues, increase efficiency, drive down prices, and continue the boom.

“Among the thousands of shale producers, you can guarantee there are pioneers just like those who started the shale revolution,” Mills wrote in the Wall Street Journal last week. “As profit margins erode due to low or even lower future prices, the pioneers will try out the revolutionary new shale techniques that have yet to be deployed.”

Despite a rig count that is diminishing as prices head south, there are signs that increases in productivity could help shale drillers ride out low prices. In North Dakota alone, the average number of barrels each rig produces is up to 530 per day – a big gain from 300 barrels less than two years ago, according to EIA’s October 2014 drilling productivity report.

Still, overproduction of natural gas in the Marcellus has laid bare some of the obstacles to supporting gas and oil production. In Pennsylvania, for example, the lack of pipeline infrastructure keeps Marcellus gas from market, creating a glut that’s driven prices down.

If there’s less oil and gas than EIA anticipates, it could threaten the profitability of long-term infrastructure investments like natural gas export terminals and pipelines.

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But for now, the boom shows no sign of slowing. US oil production rose 0.4 percent to 8.97 million barrels a day last week, according to EIA. That's the highest level in at least three decades. And oil prices – hovering in the $80-a-barrel range this week – are not yet low enough to seriously threaten shale production, according to most analysts.